Guides · Business structure

Should a Locum Form an S-Corp?

Published 5 August 202614 min read

This is the most oversold idea in independent physician finance. The pitch is always some version of "stop paying 15.3% self-employment tax on all your income" — and it is not exactly false, but the number it implies is roughly three times the number you will actually see, and the part that generates the saving is the part most likely to attract an examination.

Here is the mechanism, the real arithmetic at 2026 rates, and the conditions under which the answer is yes.

The mechanism, in one paragraph

A single-member LLC or PLLC is disregarded by default: profit lands on your Schedule C and pays self-employment tax. Elect S-corporation treatment on Form 2553 and the same business becomes a separate filer. You become its employee. It pays you a salary, which carries ordinary employee and employer FICA, and it distributes the rest of the profit to you as a shareholder distribution, which carries no payroll tax at all. Both amounts are still subject to income tax. That is the whole idea: the distribution escapes the 15.3%.

Note what the election is not. It is not a liability shield — that comes from the LLC or PLLC underneath it, and in most states a professional entity does not shield you from your own clinical negligence anyway. It is not an income tax saving. And it is not a route to the section 199A deduction.

Why the saving is not 15.3%

Two facts shrink the prize enormously, and neither appears in the pitch.

First, the Social Security half stops. For 2026 the 12.4% Social Security component applies only up to the $184,500 contribution and benefit base. If your reasonable salary is at or above that figure, the corporation has already paid the entire Social Security tax you would have paid as a sole proprietor. The only thing your distribution avoids is the 2.9% Medicare component plus the 0.9% surtax — a 3.8% marginal rate, not 15.3%.

Second, self-employment tax is charged on 92.35% of profit, and half of it is deductible. The sole-proprietor position is better than the sticker rate suggests to begin with, so the gap you are closing is smaller than the comparison implies.

The real numbers at 2026 rates

Below is the same business run twice — once as a sole proprietor, once as an S-corporation — at four levels of net profit and three salary splits. Single filer, Texas (so no state income tax distorts the federal mechanism), $2,400 a year assumed for payroll service, the separate Form 1120-S return and registered agent fees. "All-in cost" is every tax plus every fee.

Read down the salary-split column rather than across. At every income level, the benefit collapses as the salary rises toward a defensible figure — and at $189,000 and $252,000 of profit with a 70% salary, the election loses money. Nowhere in this table does an S-corp save anything like 15.3% of profit. The best case here is about $8,900 a year, and it is bought with a salary that a physician would struggle to defend.

Reasonable compensation is the whole game

An S-corporation must pay a shareholder-employee reasonable compensation for services actually rendered before making distributions. There is no percentage in the Code, no percentage in the regulations, and no safe harbour. The IRS states the position plainly in its S Corporation Compensation and Medical Insurance Issues guidance: where an officer provides services and takes distributions, the IRS may recharacterise those distributions as wages, with back payroll tax, interest and penalties.

The courts have been consistent. In Watson v. United States, 668 F.3d 1008 (8th Cir. 2012), an accountant who paid himself $24,000 while his firm distributed several hundred thousand dollars had $91,044 recharacterised as wages for each of two years. In David E. Watson, P.C. and cases before it — Radtke, Spicer Accounting — the pattern is the same: where essentially all of the revenue is generated by one person's personal professional services, most of the profit is compensation.

That reasoning is unusually hostile to a locum. A hospital pays your rate because you attend and treat patients. There is no capital, no staff, no intangible asset, no goodwill generating the income. It is difficult to argue that a large fraction of the profit is a return on anything other than your labour.

It does not unlock the QBI deduction

This is the most common piece of misinformation aimed at physicians. Section 199A gives many pass-through businesses a 20% deduction — but § 199A(d)(2)(A) classifies "the performance of services in the field of health" as a specified service trade or business, and for an SSTB the deduction phases out and then vanishes.

For 2026 the threshold amounts are $201,775 (single, head of household) and $403,550 (joint), and the One Big Beautiful Bill Act widened the phase-in range to $75,000/$150,000. So the deduction reaches zero at $276,775 of taxable income for a single filer and $553,550 for joint filers. An S-corporation is still a business performing services in the field of health. The election changes nothing here — the test looks at what the business does, not at how it files.

If your taxable income sits inside the phase-in band, the wage-limitation mechanics can occasionally make S-corp wages helpful at the margin. That is a genuinely technical situation, it applies to a narrow income window, and it is a reason to speak to a CPA rather than to act on a web page.

What it actually costs to run

The $2,400 in the table is a reasonable middle estimate, not a quote. In practice:

• Payroll service — $500 to $1,200 a year. You cannot skip this; running payroll by hand and filing Forms 941, 940, W-2 and W-3 yourself is a false economy.
• Form 1120-S preparation — $800 to $2,500 a year on top of your personal return. The corporate return is due 15 March, a month before your 1040, and the late-filing penalty is charged per shareholder per month.
• Registered agent and state annual reports — $50 to $500.
• Federal and state unemployment tax on your own wages, which a sole proprietor does not pay.
• Your own time — a separate bank account, payroll runs, corporate minutes, and the discipline never to pay a personal expense from the business account.

There is also a subtle trap on health insurance. For a shareholder owning more than 2%, premiums the corporation pays must be added to your W-2 wages and then deducted above the line on your 1040. The income tax result is a wash, but the premiums increase your Medicare wage base — so mishandling this quietly erodes part of the saving. It is covered in the IRS guidance linked above, and payroll providers get it wrong routinely.

The states where it backfires

Federal arithmetic is only half the question. Several jurisdictions tax S-corporations at entity level or ignore the election entirely:

• Tennessee does not recognise federal S-corporation status. The entity pays the 6.5% excise tax on net earnings plus the franchise tax. In a state with no individual income tax, the election frequently converts a zero state bill into a real one.
• New York City does not recognise S-corporation status either; the entity pays the General Corporation Tax on the same income, on top of New York State's fixed-dollar minimum tax.
• The District of Columbia taxes the entity under its corporate franchise tax.
• California charges S-corporations 1.5% of net income with an $800 minimum franchise tax.
• Illinois charges a 1.5% Personal Property Replacement Tax on S-corporation net income.
• New Jersey, Minnesota and Nevada apply minimum taxes or fees scaled to receipts, payroll or property.

Because a locum works across state lines, this gets worse rather than better: the entity may need to register and file in several states, each with its own annual report and fee. The calculator surfaces a warning for the state you select, but a multi-state locum should treat entity registration as a question for a CPA before the election, not after.

So: yes or no?

A defensible summary of the above:

• Below roughly $150,000 of net profit — almost certainly no. The running costs consume the saving, and a defensible salary leaves little to distribute.
• $150,000 to $300,000, working steadily, in a state that respects the election — worth modelling. The honest range is a few thousand dollars a year, not a transformation.
• Above $300,000 — the benefit is real but modest, because a defensible salary is already at or above the Social Security wage base and only the 3.8% Medicare band is in play.
• In Tennessee, New York City or DC — probably no, regardless of income.
• If you work fewer than about 20 weeks a year — no. Fixed costs against a small profit.

The other honest point: the S-corp is not the biggest lever available to you. A solo 401(k) at 2026 limits shelters up to $72,000 of income and is available to a sole proprietor with no entity, no payroll and no extra return. If you are considering an S-corp before you have filled the retirement plan, start there instead.

What to ask a CPA

1. What reasonable salary would you defend on my facts, and how would you document it?
2. What is the total annual cost — payroll, 1120-S, state filings — in the states I actually work in?
3. Do any of my working states tax the entity or ignore the election?
4. How will my health insurance premiums be run through payroll?
5. At my income, what is the projected annual benefit net of every cost, and how does it compare with maximising a solo 401(k) first?
6. What happens to this structure in a year when I work half as much?

If the answer to question 1 is a percentage with no reasoning behind it, find a different adviser.

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